-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OL5z0BNHrp2NuJm0Wp3AB71Ntgox/X8qBA2R179lnnp5ZwH+uFUnZ1SiYbxr8Mdf aXh9HkNo4fjY+SBFUSbi8Q== 0000912057-00-024502.txt : 20000516 0000912057-00-024502.hdr.sgml : 20000516 ACCESSION NUMBER: 0000912057-00-024502 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COBALT GROUP INC CENTRAL INDEX KEY: 0001036290 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 911674947 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-26623 FILM NUMBER: 632800 BUSINESS ADDRESS: STREET 1: 2200 FIRST AVENUE S STREET 2: STE 400 CITY: SEATTLE STATE: WA ZIP: 98134 BUSINESS PHONE: 2063867535 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________________ TO _________________ Commission File No. 000-26623 THE COBALT GROUP, INC. (Exact name of registrant as specified in its charter) WASHINGTON 91-1674947 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 2200 FIRST AVENUE SOUTH, SEATTLE, WASHINGTON 98134 - ----------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (206) 269-6363 - ----------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . --- --- As of April 30, 2000, 17,247,220 shares of the Company's common stock, $.01 par value, were outstanding. THE COBALT GROUP, INC. FORM 10-Q QUARTERLY REPORT TABLE OF CONTENTS PART I - Financial Information Item 1. - Financial Statements Consolidated Balance Sheets as of March 31, 2000 and December 31, 1999 3 Consolidated Statements of Operations for the Three Months Ended March 31, 2000 and 1999 4 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2000 and 1999 5 Notes to Consolidated Financial Statements 6 Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations Overview and Outlook 10 Results of Operations 12 Liquidity and Capital Resources 13 Risk Factors 14 Item 3. - Quantitative and Qualitative Disclosures about Market Risk 16 Part II - Other Information Item 2. - Changes in Securities and Use of Proceeds 16 Item 6. - Exhibits and Reports on Form 8-K 17 Signatures 19 2 ITEM 1. FINANCIAL STATEMENTS THE COBALT GROUP, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share amounts)
MARCH 31, DECEMBER 31, 2000 1999 ------- ------- (UNAUDITED) ASSETS Current assets Cash and cash equivalents $16,817 $14,224 Accounts receivable, net of allowance for doubtful accounts of $533 (unaudited) and $497, respectively 6,031 4,581 Notes receivable from Boats.com, Inc. 7,006 -- Other current assets 1,160 2,225 ------- ------- 31,014 21,030 Capital assets, net of accumulated depreciation of $2,046 (unaudited) and $1,707, respectively 5,558 4,636 Intangible assets, net of accumulated amortization of $5,524 (unaudited) and $4,017, respectively 29,557 27,330 Other assets 962 1,036 ------- ------- Total assets $67,091 $54,032 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable $ 1,858 $ 2,020 Accrued liabilities 1,493 1,520 Deferred revenue 2,747 2,456 Deferred gain on sale of YachtWorld 7,000 -- Notes payable 253 -- Software financing contract, current portion 300 362 Capital lease obligations, current portion 706 844 ------- ------- 14,357 7,202 ------- ------- Non-current liabilities Software financing contract, non-current portion -- 28 Capital lease obligations, non-current portion 1,129 1,217 ------- ------- 1,129 1,245 ------- ------- Shareholders' equity Preferred stock; $0.01 par value per share; 100,000,000 shares authorized; 0 shares issued and outstanding -- -- Common stock; $0.01 par value per share; 200,000,000 shares authorized; 17,210,941 (unaudited) and 16,855,431 and issued and outstanding, respectively 172 169 Additional paid-in capital 91,955 89,957 Deferred compensation (2,044) (3,036) Notes receivable from shareholders (144) (144) Accumulated deficit (38,334) (41,361) ------- ------- 51,605 45,585 ------- ------- Total liabilities and shareholders' equity $67,091 $54,032 ======= =======
See accompanying notes to consolidated financial statements. 3 THE COBALT GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
THREE MONTHS ENDED MARCH 31, ------------------------- 2000 1999 ----------- ----------- Revenues $ 9,284 $ 2,453 Cost of revenues 1,775 540 ----------- ----------- Gross profit 7,509 1,913 Operating expenses Sales and marketing 4,276 1,650 Product development 1,254 401 General and administrative 3,783 1,809 Amortization of intangible assets 1,508 61 Stock-based compensation 290 335 ----------- ----------- Total operating expenses 11,111 4,256 ----------- ----------- Loss from operations (3,602) (2,343) Interest expense (68) (49) Interest income 317 61 Gain on sale of YachtWorld 6,446 -- Other income (expense), net (66) (4) ----------- ----------- Net income (loss) $ 3,027 $ (2,335) =========== =========== Net income (loss) available to common shareholders $ 3,027 $ (2,926) =========== =========== Basic net income (loss) per share $ 0.18 $ (1.97) =========== =========== Weighted-average shares outstanding--basic 17,082,768 1,488,681 =========== =========== Diluted net income (loss) per share $ 0.16 $ (1.97) =========== =========== Weighted-average shares outstanding--diluted 18,587,055 1,488,681 =========== ===========
See accompanying notes to consolidated financial statements. 4 THE COBALT GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, -------------------- 2000 1999 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 3,027 $ (2,335) Adjustments to reconcile net income (loss) to net cash used in operating activities: Amortization of deferred compensation 290 335 Depreciation and amortization 2,040 250 Net (gain) loss on sale of assets (6,382) 4 Changes in: Accounts receivable (1,564) (151) Other assets 1,133 (977) Accounts payable and accrued liabilities (138) 1,014 Deferred revenues 506 215 -------- -------- Net cash used in operating activities (1,088) (1,645) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of capital assets (1,593) (172) Investment in IntegraLink (1,614) -- Proceeds from sale of capital assets 24 -- Proceeds from sale of YachtWorld 6,674 -- -------- -------- Net cash provided by (used in) investing activities 3,491 (172) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from exercise of stock options 331 66 Proceeds from employee stock purchase plan 175 -- Payment of capital lease obligations and software financing contract (316) (129) -------- -------- Net cash provided by (used in) financing activities 190 (63) -------- -------- Net increase (decrease) in cash and cash equivalents 2,593 (1,880) Cash and cash equivalents, beginning of period 14,224 5,756 -------- -------- Cash and cash equivalents, end of period $ 16,817 $ 3,876 ======== ========
See accompanying notes to consolidated financial statements. 5 THE COBALT GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. NATURE OF THE BUSINESS The Cobalt Group, Inc. (the "Company") is a provider of Internet marketing and data aggregation services to individual franchised automobile dealerships, multi-franchise automobile dealer groups and automobile manufacturers in the United States. The Company enables its clients to develop and implement e-business strategies and to capitalize on the increasing use of the Internet by consumers to research, evaluate and buy new and pre-owned vehicles, parts and accessories and automotive-related services such as financing and insurance. The Company's current service offerings include comprehensive Web site design, development and management; data extraction, aggregation and maintenance; Internet advertising and promotion; and Internet training and support. The Company also provides vehicle parts location, data acquisition and management services to its automobile dealership clients. During 1999 the Company maintained YachtWorld.com, a marine Web site, which contains photo listings of yachts for sale on the Web, as well as other marine-related information. On January 25, 2000 the Company sold this division. The accompanying unaudited financial statements include all adjustments, consisting only of normal recurring adjustments that, in the opinion of management, are necessary to present fairly the financial information set forth therein. Certain information and note disclosures normally included in financial statements, prepared in accordance with generally accepted accounting principles, have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Results of operations for the three month period ended March 31, 2000 are not necessarily indicative of future financial results. Investors should read these interim statements in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and notes thereto for the fiscal year ended December 31, 1999 included in our annual report on Form 10-K, SEC File No. 000-26623. 2. RECENT ACCOUNTING PRONOUNCEMENTS In March 2000, the EITF issued EITF 00-2 "Accounting for Web site Development Costs". This statement requires that capitalization and expensing of defined costs incurred during the development of a Web site. Costs incurred during the planning stage should be expensed; the costs incurred for activities during the web application and infrastructure development stage should be capitalized; and generally the costs incurred during the operation stage should be expensed. Costs incurred to create the initial graphics for the Web site would be capitalized and that any subsequent updates would be expensed as incurred. The adoption of this statement is not expected to have a material impact on the Company's results of operations, financial position or cash flows. In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." SAB 101 summarizes certain of the SEC's views in applying generally accepted accounting principles to revenue recognition in financial statements. In March 2000, the SEC issued an amendment to SAB 101 to defer the effective date of implementation for one quarter with earlier application encouraged. The Company has not yet adopted SAB 101 and will be required to do so in the second quarter of 2000. The Company is currently determining what effects the application of SAB 101 may have on revenue recognition and operating results. In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133 ("FAS 133"), "Accounting for Derivative Instruments and Hedging Activities." In May 1999, the FASB voted to delay the effective date of FAS 133 by one year. Adoption of FAS 133 is required for fiscal year 2001. This statement establishes a new model for accounting for derivatives and hedging activities. Under FAS 133, all derivatives must be recognized as assets and 6 liabilities and measured at fair value. The Company adopted FAS 133 on January 1, 1999. The Company has determined that it does not have any derivatives or hedging activities. 3. ACQUISITION OF INTEGRALINK On January 14, 2000 the Company acquired IntegraLink, Inc. ("IntegraLink"), whose principal business is advanced data extraction and reporting services. At closing, the Company paid aggregate purchase consideration of (i) $1.5 million in cash; (ii) promissory notes in the principal amount of $250,000 bearing interest at 8% due January 14, 2001; (iii) 85,000 shares of the Company's common stock valued at $22.00 per share; and (iv) expenses related to the acquisition in the amount of $114,000. The Company accounted for the IntegraLink acquisition using the purchase method of accounting. The aggregate purchase price of $3.7 million was allocated to the net assets acquired, based on their respective fair market values. The excess of the purchase price, including acquisition costs, over the fair market value of the assets acquired were allocated to intangible assets. The historical operations of IntegraLink are not material to the Company's financial position or results of operations, therefore, pro forma financial statements have not been presented for this acquisition. 4. SALE OF YACHTWORLD On January 25, 2000 the Company sold the assets related to its YachtWorld division to Boats.com, Inc. for cash proceeds of $3.5 million and a note receivable in the amount of $10.5 million. The note bears interest at 8.0% and is due in three installments during 2000. The first installment of $3.5 million was received on March 27, 2000. The Company also received warrants to purchase 473,455 shares of Boats.com common stock at $18.91 per share. In addition, the Company received the right to appoint a representative to Boats.com's board of directors until the note is paid in full. Revenues for YachtWorld were $602,000, $185,000 and $80,000 for the years ended December 31, 1999, 1998 and 1997, respectively. The following assets and liabilities were sold in the transaction: Accounts receivable $114,000 Capital assets 50,000 Accounts payable 47,000 Deferred revenue 215,000 Other accrued liabilities 1,000 In connection with this transaction, the Company has recorded a gain of $6.4 million through March 31, 2000. Terms of the agreement require additional cash payments of $7 million, plus interest, with equal installments due on September 30, 2000 and December 31, 2000. Because of the risk associated with the collection of these payments, the Company has deferred that portion of the gain, which is presented on the balance sheet as deferred gain on sale of YachtWorld. 5. ACQUISITION OF PARTSVOICE On April 30, 1999, the Company acquired all of the equity interests in PartsVoice, LLC, ("PartsVoice") whose principal business is vehicle parts data acquisition and management services. Immediately prior to the closing, PartsVoice distributed to its owners certain assets and liabilities. The Company paid aggregate purchase consideration for the PartsVoice equity of (i) $26.0 million in cash; (ii) 500,000 shares of Series C convertible preferred mandatorily redeemable stock at $8.00 per share; and (iii) warrants to purchase 160,000 shares of the Company's common stock at $6.00 per share. The warrants were valued at $381,000 using the Black Scholes option-pricing model. The acquisition was accounted for using the purchase method of accounting. The aggregate purchase price was allocated to the net assets acquired, based upon their respective fair market values. The excess of the purchase price, including acquisition costs, over the fair market value of the assets acquired was allocated to intangible assets. The following summarizes the unaudited pro forma results of operations for the three months ended March 31, 1999, on a combined basis, as if the Company's acquisition of PartsVoice occurred on January 1, 7 1999, after including the impact of certain adjustments, such as amortization of goodwill and interest on acquisition indebtedness: Revenues $ 5,009,000 Net loss (2,947,000) Basic net loss per share $ (2.42) The unaudited pro forma results are not necessarily indicative of the results of operations that would have been reported had the acquisition occurred prior to the beginning of the periods presented. In addition, they are not intended to be indicative of future results. 6. NET INCOME (LOSS) PER SHARE The following table sets forth the computation of the numerators and denominators in the basic and diluted net income (loss) per share calculations for the periods indicated:
THREE MONTHS ENDED MARCH 31, ---------------------------- 2000 1999 ------------ ------------- (IN THOUSANDS, EXCEPT SHARE AMOUNTS) Numerator: Net income (loss) $ 3,027 $ (2,335) Dividends on mandatorily redeemable convertible preferred stock -- (584) Accretion of mandatorily redeemable convertible preferred stock -- (7) ------------ ------------- Net income (loss) available to common shareholders $ 3,027 $ (2,926) ============ ============ Denominator: Weighted-average shares outstanding - basic 17,082,768 1,488,681 Effect of dilutive securities Employee stock options 1,338,154 -- Warrants 166,133 -- ------------ ------------- Weighted-average shares outstanding - diluted 18,587,055 1,488,681 ============ =============
7. INTANGIBLE ASSETS 8 Intangible assets consist of the following:
USEFUL LIVES MARCH 31, 2000 DECEMBER 31, 1999 ------------ -------------- ----------------- (YEARS) (IN THOUSANDS) (UNAUDITED) Goodwill 4 - 6 $ 13,871 $ 13,247 Trademarks/trade name 6 1,200 1,200 Customer Lists 3 - 6 14,990 14,600 Existing technology 5 3,160 1,100 Workforce 3 - 5 1,860 1,200 --------- -------- 35,081 31,347 Accumulated amortization (5,524) (4,017) --------- -------- $ 29,557 $ 27,330 ========= ========
These assets are amortized over their respective estimated useful lives. 8. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid for interest during the three months ended March 31, 2000 and 1999 was $68,000 and $49,000, respectively. During the three months ended March 31, 1999, the Company purchased capital assets under capital leases and a software financing contract of $1,437,000. There were no such transactions for the three months ended March 31, 2000. 9. SUBSEQUENT EVENTS On May 1, 2000 the Company reached an agreement with DaimlerChrysler Corporation to provide Web site design, hosting and maintenance services to its Chrysler, Dodge and Jeep dealers. The initial term of the agreement is through December 31, 2002, with an option to renew through December 31, 2005. DaimlerChrysler will be obligated to pay minimum annual revenues to the Company during the initial term of the agreement. In connection with the agreement, the Company will issue 258,164 shares of its common stock to DaimlerChrysler. The Company also will issue warrants to purchase 688,437 and 516,328 shares of its common stock at $10.03 and $12.53 per share, respectively. A third warrant to purchase 249,559 shares at $15.04 per share will be contingent upon DaimlerChrysler's exercise of its option to renew the agreement. On April 12, 2000 the Company entered into a loan agreement with Charter Financial, Inc. Under terms of the agreement, the Company can borrow up to $2.5 million, secured by specified capital assets. To date, the Company has borrowed $1.2 million under this facility. Amounts borrowed are due in equal installments over 36 months at an effective interest of approximately 13%. The agreement contains restrictive covenants, including provisions that require maintenance of insurance, impose limitations on changes in the Company's ownership, provide for prepayment penalties, and require maintenance of unrestricted cash balances of $7.0 million. An affiliate of the Company's largest shareholder, Warburg, Pincus Equity Partners, L.P., owns a 49.9% interest in Charter Financial. 9 ITEM 2. -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. INVESTORS SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS REPORT. IN ADDITION TO HISTORICAL INFORMATION, THE FOLLOWING DISCUSSION CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 21E OF THE SECURITIES AND EXCHANGE ACT, AS AMENDED, THAT INVOLVE KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES, SUCH AS STATEMENTS OF OUR PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS. YOU SHOULD READ THE CAUTIONARY STATEMENTS MADE IN THIS REPORT AS BEING APPLICABLE TO ALL RELATED FORWARD-LOOKING STATEMENTS WHEREVER THEY APPEAR IN THIS REPORT. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED UNDER "RISK FACTORS" BEGINNING ON PAGE 13 AND IN OUR REPORTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, INCLUDING OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999. YOU SHOULD NOT RELY ON THESE FORWARD-LOOKING STATEMENTS, WHICH REFLECT ONLY OUR OPINION AS OF THE DATE OF THIS REPORT. WE DO NOT ASSUME ANY OBLIGATION TO REVISE FORWARD-LOOKING STATEMENTS. OVERVIEW AND OUTLOOK OVERVIEW We derive our revenues from fees charged to our automobile dealership, dealer group and manufacturer clients for Web site design, development, hosting and maintenance and data extraction and aggregation services. Revenues from Web site hosting and maintenance and data extraction and aggregation services are recognized ratably over the applicable service period. Revenues from design and custom development are recognized based on completion and delivery of services or products as outlined in the applicable service agreement or contract. In certain cases, if projects require significant modification or customization, revenues are recognized on a percentage-of-completion basis based on the total project costs to be incurred. The majority of our services are sold to clients under short-term service agreements with an initial term of three to twelve months and month-to-month thereafter. We recognize revenues net of promotional discounts. Our cost of revenues consists of the costs associated with production, maintenance and delivery of our services. These costs include the costs of production, processing and design personnel, communication expenses related to data transfer, fees payable to third parties for distribution of vehicle inventory data to other Web sites and for banner advertising, site content licensing fees and costs of Web and database servers used to host client data. As we continue to expand our client base, we expect to leverage our production, maintenance and service delivery platform, which may maintain or improve our gross margin. However, some strategic new services may have lower margins than our current service offerings. Further, we continue to experience increasing demand for custom design and development projects, which carry higher costs. As we respond to the customer demand for these services our gross margin may decline. ACQUISITIONS AND DISPOSITIONS In April 1999 we acquired PartsVoice, LLC, an Oregon limited liability company, whose principal business is vehicle parts data acquisition and management services. The purchase price, including transaction expenses, was $30.7 million, of which $26.3 million was paid in cash and $4.4 million was paid by issuance of preferred stock and warrants. The PartsVoice acquisition was accounted for as a purchase transaction, and substantially all of the purchase price was allocated to intangible assets. The consolidated results of operations include PartsVoice for the period May 1, 1999 to March 31, 2000. In January 2000 we purchased IntegraLink, Inc., which expanded our client base and enhanced our data extraction capabilities. At closing we paid purchase consideration and expenses of $1.6 million in cash, promissory notes in the principal amount of $250,000 due January 14, 2001, and 85,000 shares of the Company's common stock valued at $22.00 per share, for a total purchase price of $3.7 million. The IntegraLink acquisition was accounted for as a purchase transaction, and substantially all of the purchase price was allocated to intangible assets. 10 In January 2000 we sold the assets of our YachtWorld division to Boats.com, Inc. The sale provides capital for future growth and operations of our core business. The division was sold for cash proceeds of $3.5 million and a note receivable in the amount of $10.5 million. The note bears interest at 8.0% and is due in three installments during 2000. The first installment of $3.5 million was paid on March 27, 2000. We also received warrants to purchase 473,455 shares of Boats.com common stock at $18.91 per share. In connection with this transaction, the Company has recorded a gain of $6.4 million through March 31, 2000. Terms of the agreement require additional cash payments of $7 million, plus interest, with equal installments due on September 30, 2000 and December 31, 2000. Because of the risk associated with the collection of these payments, the Company has deferred that portion of the gain, which is presented on the balance sheet as deferred gain on sale of YachtWorld. DAIMLERCHRYSLER AGREEMENT On May 1, 2000 we reached an agreement with DaimlerChrysler Corporation to provide Web site design, hosting and maintenance services to its Chrysler, Dodge and Jeep dealers. The initial term of the agreement will be through December 31, 2002, with an option to renew through December 31, 2005. DaimlerChrysler will be obligated to pay minimum annual revenues to us during the initial term of the agreement. In connection with the agreement, we will issue 258,164 shares of our common stock to DaimlerChrysler. We also will issue warrants to purchase 688,437 and 516,328 shares of our common stock at $10.03 and $12.53 per share, respectively. A third warrant to purchase 249,559 shares at $15.04 per share will be contingent upon DaimlerChrysler's exercise of its option to renew the agreement. We expect non-cash charges related to the common stock and warrants that we issue in connection with the DaimlerChrysler agreement to total approximately $14.8 million, which will be amortized ratably with the revenue recognized over the initial term of the agreement. This valuation does not attribute value to the third warrant because issuance will be contingent upon DaimlerChrysler's exercise of its renewal option. Upon renewal, non-cash charges attributable to the third warrant will be calculated and amortized over the renewal period. We have other relationships with DaimlerChrysler to provide Web site services to Mercedes-Benz dealers and to provide data extraction and aggregation services. Our new agreement will increase the relative importance of DaimlerChrysler to us and may create increased credit risk. OUTLOOK As a strategic initiative or as a response to the competitive environment, we may from time to time make pricing, service, technology or marketing decisions or business or technology acquisitions that would require near-term investment, including staff, management and infrastructure costs and may negatively impact near-term operating results. For example, we anticipate that our agreement with DaimlerChrysler will require increased staffing and infrastructure to accommodate the anticipated growth in our client base. We also may experience seasonality in our business in the future resulting in diminished revenues as a result of diminished demand for our services during seasonal periods that correspond to seasonal fluctuations in the automotive industry or to fluctuations in industry spending for Internet marketing services. Due to all or any of the foregoing factors, in some future quarter our operating results may fall below the expectations of securities analysts and investors. In such event, the trading price of our common stock would likely be materially and adversely affected. See "--Risk Factors--Our quarterly results likely will fluctuate, which may subject the market price of our common stock to rapid and unpredictable change." Our continued growth and acquisitions of other businesses have placed and will continue to place a significant strain on our managerial, operational and financial resources. To manage our anticipated growth, we must continue to implement and improve our operational and financial systems and must expand, train and manage our employee base. We may not be able to manage the expansion of our operations effectively, and our systems, procedures or controls may not be adequate to support our operations. Any inability to manage growth effectively could have a material adverse effect on our business, results of operations and financial condition. See "Risk Factors--Any failure to manage our growth effectively will adversely affect our business and results of operations." 11 In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." SAB 101 summarizes certain of the SEC's views in applying generally accepted accounting principles to revenue recognition in financial statements. We have not yet adopted SAB 101 and will be required to do so in the second quarter of 2000. We are currently determining what effects the application of SAB 101 may have on our revenue recognition and operating results. We have incurred net losses each year since we began operations. Excluding the gain on sale of YachtWorld we had a net loss of $3.4 million for the quarter ended March 31, 2000, which includes non-cash charges of $1.5 million in amortization of intangible assets and $290,000 in stock-based compensation. We intend to continue our investment in technology infrastructure development, marketing and promotion, product development and strategic relationships. As a result, we expect to continue to incur net losses and negative cash flows from operations at least through 2001. Our limited operating history makes it difficult to forecast further operating results. Although our net revenues have grown in recent quarters, we cannot be certain that net revenues will continue to increase or that they will increase at a rate sufficient to achieve and maintain profitability. Even if we were to achieve profitability in any period, we might fail to sustain or increase that profitability on a quarterly or annual basis. RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999 REVENUES. Revenues increased to $9.3 million for the three months ended March 31, 2000 from $2.5 million for the same period in 1999, an increase of $6.8 million, or 278.5%. Of the increase, $3.0 million, or 44.4% of the change, is attributable to revenues generated by PartsVoice and IntegraLink. The remaining 55.6% of the change is due to an increase in our client base and the sale of additional services to existing clients. The revenue increase is net of client attrition of 2.2% during the three months ended March 31, 2000 compared with a client attrition rate of 2.1% for the same period in 1999. Attrition rates were determined based on total dealer Web site clients as of March 31, 2000 and 1999, respectively. As of March 31, 2000 Cobalt was paid to manage and maintain Web sites for 5,637 dealer clients, compared to 3,460 at March 31, 1999. COST OF REVENUES. Cost of revenues increased to $1.8 million for the three months ended March 31, 2000 from $540,000 for the same period in 1999, an increase of $1.2 million or 228.7%. Of this increase, $819,000, or 66.3% of the change, is related to increased staffing required to accommodate our increased client base. PartsVoice accounts for $289,000, or 23.4% of the change, and $134,000, or 10.8%, is associated with the costs of equipment required to host the increased number of client Web sites. Cost of sales as a percentage of sales decreased to 19.1% for the quarter ended March 31, 2000 from 22.0% for same period in 1999. The increase in the product mix of higher-margin parts locating and hosting and maintenance services caused the decrease in cost of sales as a percentage of revenues. SALES AND MARKETING. Sales and marketing expenses consist primarily of compensation for sales and marketing personnel, including sales commissions, travel expenses and promotional advertising and marketing costs. Sales and marketing expenses increased to $4.3 million for the three months ended March 31, 2000 from $1.7 million for the same period in 1999, an increase of $2.6 million, or 159.1%. Of this increase, $1.5 million, or 57.5% of the change, is due to increased sales and marketing personnel. Sales and marketing expenses associated with PartsVoice accounted for $386,000, or 14.7% of the change, and $284,000, or 10.8%, is attributable to an increase in commissions paid to sales personnel, which reflects approximately 500 dealer Web sites added in the first quarter of 2000 compared to approximately 200 dealer Web sites added for the same period in 1999. PRODUCT DEVELOPMENT. Our product development expenses consist primarily of compensation for product development personnel and costs of related computer equipment. We expense product development costs as they are incurred. Our product development expenses increased to $1.3 million for the three months ended March 31, 2000 from $401,000 for the same period in 1999, an increase of $853,000, or 212.8%. Substantially all of the change is attributable to the increase in the number of our product development personnel and associated computer equipment costs resulting from increased emphasis on product development initiatives. 12 GENERAL AND ADMINISTRATIVE. Our general and administrative expenses consist primarily of compensation for administrative personnel, facilities and fees for outside professional advisors. General and administrative expenses increased to $3.8 million for the three months ended March 31, 2000 from $1.8 million for the same period in 1999, an increase of $2.0 million, or 109.2%. Of this increase, $505,000, or 25.6% is due to Parts Voice, $414,000, or 21.0% is attributable to increased facilities costs for new company headquarters to accommodate additional personnel, including one-time expenses related to moving our corporate headquarters in the first quarter, and $363,000, or 18.4% is attributable to the increase in the number of staff and management personnel. AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets increased to $1.5 million for the three months ended March 31, 2000 from $61,000 for the same period in 1999, an increase of $1.4 million. Of this increase, $1.3 million, or 89.3% of the change, is due to amortization of intangible assets and goodwill related to the PartsVoice acquisition on April 30, 1999. The remainder of the increase is attributable to amortization of intangible assets and goodwill related to the IntegraLink acquisition on January 14, 2000. STOCK-BASED COMPENSATION. Stock-based compensation decreased to $290,000 for the three months ended March 31, 2000 from $335,000 for the same period in 1999, a decrease of $45,000, or 13.4%. The decrease is due to use of an accelerated method of amortizing deferred compensation and cancellation of employee stock options due to employee terminations. NET INCOME AND LOSS. During the three months ended March 31, 2000 we sold the assets of our YachtWorld division and realized a gain of $6.4 million. Excluding the gain on sale of YachtWorld, our net loss for the three months ended March 31, 2000 was $3.4 million compared to a net loss of $2.3 million for the same period in 1999. Increased operating expenses described above, including the increase in non-cash charges of $1.4 million for goodwill amortization, offset the increase in revenues. EARNINGS PER SHARE. Basic earnings per share increased to $0.18 for the three months ended March 31, 2000 from a loss per share of $1.97 for the same period in 1999. Excluding the gain on sale of YachtWorld the basic and diluted loss per share was $0.20 for the three months ended March 31, 2000. This compares to pro forma loss per share of $0.22 for the same period in 1999. Pro forma loss per share is computed using the weighted-average number of common shares outstanding, including the pro forma effects of conversion of the Company's preferred stock on the date those shares were originally issued. The increase in earnings per share of $.02 is due to an increase in the number of weighted-average shares outstanding during the three months ended March 31, 2000 compared to the same period in 1999, offset by the increase in net loss. LIQUIDITY AND CAPITAL RESOURCES At March 31, 2000 our cash balance was $16.8 million, which is an increase of $2.6 million from our cash balance at December 31, 1999. Net cash used in operating activities was $1,088,000 for the three months ended March 31, 2000. Cash used in operating activities consisted primarily of net operating income adjusted for gain on sale of assets, non-cash charges, increase in accounts receivable and decrease in current liabilities, offset by a decrease in other assets and increase in deferred revenues. Net cash provided by investing activities was $3.5 million for the three months ended March 31, 2000. Cash provided by investing activities consisted of cash proceeds received from the sale of YachtWorld, offset by the investment in IntegraLink and purchase of capital assets. Net cash provided by financing activities was $190,000 for the three months ended March 31, 2000. Cash provided by financing activities consisted of proceeds from stock option exercises and employee stock purchase plan, offset by payments of capital leases and a software financing contract. We have made substantial investments in infrastructure and in staffing and management to accommodate current and anticipated future growth. Over the last twelve months we have hired more than 130 employees, excluding the addition of PartsVoice and IntegraLink employees, and invested more than $4.3 million in capital assets. We expect to continue to increase staffing and invest in infrastructure to implement the DaimlerChrysler agreement and improve service to current clients. On April 12, 2000, we entered into a loan agreement with Charter Financial, Inc. Under terms of the agreement, we can borrow up to $2.5 million, secured by specified capital assets. To date, we have borrowed $1.2 million under terms of this facility. Amounts borrowed are due in equal installments over 36 months at an effective interest of approximately 13%. The agreement contains restrictive covenants, including provisions that require maintenance of insurance, impose limitations on changes in the Company's ownership, provide for prepayment penalties, and require maintenance of unrestricted cash balances of $7.0 million. 13 While we do not currently generate sufficient cash to fully fund operations, we believe that the current cash balance and expected payments of notes receivable by Boats.com will be sufficient to meet our cash requirements for the next twelve months. It is possible that we will need to renegotiate the cash balance restriction associated with the Charter Financial loan or use cash to retire the loan. Depending on the investment required to sustain our rate of growth and the collectibility of the Boats.com note, we may require additional equity or debt financing to meet future working capital needs. We cannot provide assurance that such additional financing will be available or, if available, that such financing can be obtained on satisfactory terms. RISK FACTORS In addition to other information in this report, investors evaluating us and our business should carefully consider the following risk factors and the additional risk factors set forth in our Form 10-K under the heading "Business--Risk Factors." OUR LIMITED OPERATING HISTORY AND UNPROVEN, EVOLVING BUSINESS MODEL MAKE IT DIFFICULT TO EVALUATE OUR PROSPECTS. We began offering our services in November 1995. Accordingly, we have only a limited operating history and our business is in an early stage of development. We must achieve broad market acceptance of our service offerings and strategic initiatives for our business to succeed. Several of our newest service offerings, including our MotorPlace.com business-to-business portal, are not yet in full commercial release or have yet to be proven in the marketplace. You should evaluate the risks and challenges that an early stage company like ours will face in the rapidly changing and competitive environment of the Internet. We cannot assure you that our new and planned future offerings will be successful or that our broader business model, as it evolves, will succeed. WE HAVE RELIED ON ISSUANCES OF EQUITY SECURITIES AND BORROWINGS TO FINANCE OUR OPERATIONS AND MAY NEED TO RAISE ADDITIONAL CAPITAL TO FUND OUR FUTURE OPERATIONS. ANY FAILURE TO OBTAIN ADDITIONAL CAPITAL WHEN NEEDED OR ON SATISFACTORY TERMS COULD DAMAGE OUR BUSINESS AND PROSPECTS. We do not generate sufficient cash to fully fund operations. Although we believe that our cash reserves and cash flows from operations will be adequate to fund our operations at least through 2000, such sources may be inadequate. To date we have financed our operations principally through the issuance of equity securities, through the sale of corporate assets, and through borrowings, and expect that we may need to raise additional capital in the future to fund our ongoing operations. Any equity or debt financing, if available at all, may be on terms that are not favorable to us. If we raise additional funds by selling stock, the percentage ownership of our then current stockholders will be reduced. Any difficulty in obtaining additional financial resources could force us to curtail our operations or prevent us from pursuing our growth strategy. Our future capital requirements depend on many factors, including, the rate at which we expand our operations to accommodate the launch of Web sites for DaimlerChrysler dealers, the extent to which we expand our MotorPlace.com business-to-business offerings, the extent to which we develop and upgrade our technology and data network infrastructure, the occurrence, timing, size and success of acquisitions, and the response of competitors to our service offerings. EXCESSIVE TURNOVER OF OUR DEALERSHIP CLIENTS COULD INCREASE OUR COSTS, DAMAGE OUR REPUTATION AND SLOW OUR GROWTH. Our service agreements with dealerships generally are short-term and cancelable on 30 days' notice. To be successful, we will need to maintain low dealership client turnover. During the quarter ended March 31, 2000, 124 Web site clients, or approximately 2.2% of our total Web site clients as of March 31, 2000, terminated use of our services. Our rate of dealership client turnover may fluctuate from period to period, and may exceed recent levels. Dealership client turnover may result from a variety of factors, including service interruptions, perceived conflicts of interest among our relationships with automobile manufacturers, and competitive service offerings. A material decrease in the number of dealerships purchasing our services could have a material adverse effect on our business, results of operations and financial condition. 14 ANY FAILURE TO MANAGE OUR GROWTH EFFECTIVELY WILL ADVERSELY AFFECT OUR BUSINESS AND RESULTS OF OPERATIONS. We are experiencing rapid growth that places significant strain upon our management and operational systems and resources. Failure to manage our growth effectively would have a material adverse effect upon our business, results of operations and financial condition. Our ability to compete effectively as a provider of Internet marketing services to the automobile industry and to manage future growth will require us to continue to improve our operational systems, software development organization and our financial and management controls, reporting systems and procedures. We may fail to make these improvements effectively. Additionally, our efforts to make these improvements may divert the focus of our personnel. Our relationships with clients and strategic partners are frequently informal and are subject to frequent change. These changes are also often informal and we are in the process of implementing procedures and controls in this area. This practice of entering into verbal agreements and of modifying or terminating past agreements by verbal agreement has resulted, and may result in the future, in disputes regarding the existence, interpretation and circumstances regarding modification or termination of commercial contracts. If our relationships with clients or strategic partners evolve in an adverse manner, if we get into contractual disputes with clients or strategic partners or if any agreements with such persons are terminated, our business could suffer. We recently have hired a significant number of new employees, including key executives, and we will continue to add personnel to maintain our ability to grow in the future. Since March 2000, we have added a number of key managerial, technical and operations personnel, including our Executive Vice President and Chief Financial Officer, as well as our Executive Vice President of Sales and Account Services, Vice President of Human Resources, Vice President and General Manager of Parts Voice, Vice President and General Manager of IntegraLink and Vice President and General Manager, Detroit. We must integrate our key executives into a cohesive management team and at the same time increase the total number of employees and train and manage our employee work force in a timely and effective manner to expand our business. We cannot guarantee that we will be able to do so successfully. To manage the expected growth of our operations and personnel, we must continue improving or replacing existing operational, accounting and information systems, procedures and controls. We will also need to expand, train and manage our growing employee base, particularly our finance, administrative and operations staff. Further, we must manage effectively our relationships with our dealer, dealer group and manufacturer clients other third parties necessary to our business. If we are unable to manage growth effectively, our business could suffer. OUR QUARTERLY RESULTS LIKELY WILL FLUCTUATE, WHICH MAY SUBJECT THE MARKET PRICE OF OUR COMMON STOCK TO RAPID AND UNPREDICTABLE CHANGE. As our business grows and the market for Internet marketing services matures, we expect that our quarterly operating results will fluctuate. Factors that we expect to lead to such period-to-period changes include: - the level of demand in the automotive industry for Internet marketing and data aggregation services; - the amount and timing of increased expenditures for expansion of our operations, including the hiring of new employees, capital expenditures and related costs; - the rate and volume of additions to our client base; - our ability to continue to enhance, maintain and support our technology; - the amount and timing of expenditures by clients for our services; - the introduction of new products or services by us or our competitors; 15 - our ability to attract and retain personnel with the necessary technical, sales, marketing and creative skills required to develop our services and to service our clients effectively; - technical difficulties with respect to the Internet or infrastructure; and - economic conditions generally and those specific to the automotive industry. We expect our business to experience seasonality, reflecting seasonal fluctuations in the automotive industry, Internet and commercial online service usage and advertising expenditures. In addition, because we only began operations in March 1995, and because the market for Internet services such as ours is new and evolving, it is very difficult to predict future financial results. Due partly to our obligations under our agreement with DaimlerChrysler, and to our development of MotorPlace.com, we plan to significantly increase our sales and marketing, technology and development and general and administrative expenses during the remainder of the year 2000. Our expenses are relatively fixed in the short term and are based in part on our expectations of future revenues, which may vary significantly. If we do not achieve expected revenue targets, we may be unable to adjust our spending quickly enough to offset any revenue shortfall. If this were to occur, our results of operations could be significantly affected. ITEM 3. -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Substantially all of our cash equivalents and marketable securities are at fixed interest rates, and, as such, the fair value of these instruments is affected by changes in market interest rates. However, all of our cash equivalents and marketable securities mature within one year. As a result, we believe that the market risk arising from our holding of these financial instruments is minimal. In addition, all of our current clients pay in U.S. dollars and, consequently, our foreign currency exchange rate risk is immaterial. We do not have any derivative instruments and do not engage in hedging transactions. PART II -- OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. CHANGES IN SECURITIES On January 14, 2000, Cobalt issued 85,000 shares of common stock to three individuals in connection with Cobalt's acquisition of IntegraLink, Inc. The issuances of common stock were made in reliance on the exemption from registration provided by Rule 506 of Regulation D under The Securities Act of 1933. USE OF PROCEEDS On August 4, 1999, Cobalt's Registration Statement on Form S-1, Registration No. 333-79483 (the "Registration Statement"), was declared effective by the SEC. The Registration Statement registered 5,559,615 shares of common stock to be offered and sold in Cobalt's initial public offering and in a direct sale to General Electric Capital Assurance Company. As of March 31, 2000, Cobalt had realized and used the proceeds from its initial public offering as follows:
(in thousands) Proceeds from sale of 4,500,000 shares, less underwriters' discounts of $3,465,000 $ 46,035 Proceeds from the direct sale to General Electric Capital Assurance Company 5,000 Expenses related to the initial public offering (564) ---------- Total proceeds $ 50,471 ========= Use of proceeds: Repayment of PartsVoice acquisition notes $ 23,000 Repayment of notes payable 3,600 Payment of preferred stock dividends to related 16 parties 2,100 Payment of management fee to related party 150 Acquisition of capital assets 2,696 Investment in IntegraLink 1,614 Working capital 8,016 --------- Use of proceeds $ 41,176 =========
The balance of proceeds have been invested in short-term (less than one year) investments. ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K (a) The exhibits listed below are filed as part of this report: 3.1* Amended and Restated Articles of Incorporation of The Cobalt Group, Inc. 3.2** Bylaws of The Cobalt Group, Inc. 10.1*** Agreement and Plan of Merger dated January 14, 2000 between IL Acquisition Inc., The Cobalt Group, Inc., IntegraLink, Inc., Kevin Distelhorst, Philip Turner and Steven French. 10.2**** Asset Purchase Agreement dated January 25, 2000 between The Cobalt Group, Inc., and Boats.com, Inc. 10.3 Master Loan and Security Agreement No. 4414 dated April 12, 2000 between The Cobalt Group, Inc. and Charter Financial, Inc. 10.4 Rider to Master Loan and Security Agreement No. 4414 dated April 12, 2000 between The Cobalt Group, Inc. and Charter Financial, Inc. 27.1 Financial Data Schedule.
* Incorporated by reference to the Annual Report on Form 10-K filed by the Registrant on March 30, 2000. ** Incorporated by reference to the Registration Statement of Form S-1 (No. 333-79483) filed by the Registrant on May 27, 1999, as amended. *** Incorporated by reference to the Current Report on Form 8-K filed by the Registrant on February 1, 2000. **** Incorporated by reference to the Current Report on Form 8-K filed by the Registrant on February 14, 2000. (b) Reports on Form 8-K Current Report on Form 8-K dated January 14, 2000 and filed by the Registrant on February 1, 2000. 17 Current Report on Form 8-K dated January 26, 2000 and filed by the Registrant on February 14, 2000. 18 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. THE COBALT GROUP, INC. By: /s/ DAVID S. SNYDER ------------------------------------------ David S. Snyder, Executive Vice President and Chief Financial Officer Date: May 15, 2000 ---------------------------------------- 19 EX-10.3 2 EXHIBIT 10.3 MASTER LOAN AND SECURITY AGREEMENT NO. 4414 DEBTORS: The Cobalt Group, Inc. SECURED PARTY: Charter Financial, Inc. 2200 First Avenue South, 530 Fifth Avenue Suite 400 New York, NY 10036 Seattle, WA 98134 PartsVoice, LLC 8305 SE Monterey Portland, OR 97266 IL Acquisition Inc. 2790 Fisher Road Columbus, OH 42304 In consideration of the mutual covenants set forth herein, the above named Debtor and the above named Secured Party hereby enter into this Master Loan and Security Agreement and agree to the terms and conditions set forth herein. Each Loan Schedule which may be executed by Debtor and Secured Party from time to time pursuant to this Master Loan and Security Agreement shall be deemed to be a separate loan transaction incorporating all of the terms and conditions of this Master Loan and Security Agreement. References in this Master Loan and Security Agreement to "Agreement", "hereunder" and "herein" shall mean a Loan Schedule which incorporates this Master Loan and Security Agreement. 1. LOAN SCHEDULES. Debtor shall evidence its agreement to enter into each Agreement incorporating the terms hereof by executing and delivering to Secured Party a Loan Schedule in the form annexed hereto as Exhibit 1. Debtor's execution of a Loan Schedule shall obligate Debtor to make all of the payments set forth in the Schedule of Obligations as set forth in the Loan Schedule. The Loan Schedule shall set forth the amount of the Loan, the Term of the Loan, the number of payments to be made and the amount and dates upon which such payments are due. The Loan Schedule shall also set forth the Time Balance which means the aggregate amount of all payments which are payable under the Agreement evidenced by such Loan Schedule. Secured Party shall have no obligation to enter into or accept any Loan Schedule and no Loan Schedule shall be binding upon Secured Party until accepted by Secured Party which acceptance shall be evidenced only by the execution of such Loan Schedule by Secured Party. 2. GRANT OF SECURITY INTEREST. Debtor hereby grants to Secured Party a security interest in the personal property referred to and/or described in each Loan Schedule (hereinafter with all renewals, substitutions and replacements and all parts, repairs, improvements, additions and accessories incorporated therein or affixed thereto referred to as the "Equipment"), together with any and all proceeds thereof and any and all insurance policies and proceeds with respect thereto. 3. OBLIGATIONS SECURED. The aforesaid security interest is granted by Debtor as security for (a) the payment of the Time Balance (as set forth in the Loan Schedule) and the payment and performance of all other indebtedness and obligations now or hereafter owing by Debtor to Secured Party, of any and every kind and description under the Agreement evidenced by such Loan Schedule, and any and all renewals and extensions of the foregoing, and all interest, fees, charges, expenses and attorneys' fees accruing or incurred in connection with any of the foregoing (all of which Time Balance, indebtedness and obligations are hereinafter referred to as the "Liabilities") and (b) the payment and performance of all other indebtedness and obligations now or hereafter owing by Debtor to Secured Party, of any and every kind and description, howsoever arising or evidenced including without limitation those arising under other Loan Schedules, but excluding obligations of Debtor assigned to Secured Party by third persons (all of which indebtedness and obligations are hereinafter referred to as the "Other Liabilities"). Subject to Paragraph 16, any nonpayment of any installment or other amounts due hereunder shall result in the obligation on the part of Debtor promptly to pay also an amount equal to three and one-half percent (3.5%), (or the maximum rate permitted by law, whichever is less) of the installment or other amounts overdue. 4. DISCLAIMER OF WARRANTIES. DEBTOR ACKNOWLEDGES THAT SECURED PARTY MAKES NO WARRANTIES, EXPRESS OR IMPLIED, IN RESPECT OF THE EQUIPMENT, INCLUDING, WITHOUT LIMITATION, ANY WARRANTY OF MERCHANTABILITY OR OF FITNESS FOR ANY PARTICULAR PURPOSE. Secured Party shall not be liable to Debtor for any loss, damage or expense of any kind or nature caused, directly or indirectly, by any Equipment secured hereunder or the use or maintenance thereof or the failure of operation thereof, or the repair, service or adjustment thereof, or by any delay or failure to provide any such maintenance, repairs, service or adjustment, or by any interruption of service or loss of use thereof or for any loss of business howsoever caused. The Equipment shall be shipped directly to Debtor by the supplier thereof and Debtor agrees to accept such delivery, provided, however, that Debtor may refuse to accept any non-conforming Equipment in accordance with Section 2-606 of the Uniform Commercial Code if (i) Secured Party shall not have advanced payment for the Equipment to the seller thereof or (ii) Debtor reimburses Secured Party for its payment for the Equipment. No defect or unfitness of the Equipment, nor any failure or delay on the part of the manufacturer or the shipper of the Equipment to deliver the Equipment or any part thereof to Debtor, shall relieve Debtor of the obligation to pay the Time Balance or any other obligation under this Agreement. Secured Party shall have no obligation under this Agreement in respect of the Equipment and shall have no obligation to install, erect, test, adjust or service the Equipment. Secured Party agrees, so long as there shall not have occurred or be continuing any Event of Default hereunder or event which with lapse of time or notice, or both, might become an Event of Default hereunder, that Secured Party will permit Debtor to enforce in Debtor's own name at Debtor's sole expense any supplier's or manufacturer's warranty or agreement in respect of the Equipment. 5. ASSIGNMENT. Any transaction evidenced by a Loan Schedule shall be assignable by Secured Party, and by its assigns, without the consent of Debtor, but Debtor shall not be obligated to any assignee except upon written notice of such assignment from Secured Party or such assignee. The obligation of Debtor to pay and perform the Liabilities to such assignee shall be absolute and unconditional and shall not be affected by any circumstance whatsoever, and such payments shall be made without interruption or abatement notwithstanding any event or circumstance whatsoever, including, without limitation, the late delivery, non-delivery, destruction or damage of or to the Equipment, the deprivation or limitation of the use of the Equipment, the bankruptcy or insolvency of Secured Party or Debtor or any disaffirmance of this Agreement by or on behalf of Debtor and notwithstanding any defense, set-off, recoupment or counterclaim or any other right whatsoever, whether by reason of breach of this Agreement or of any warranty in respect of the Equipment or otherwise which Debtor may now or hereafter have against Secured Party, and whether any such event shall be by reason of any act or omission of Secured Party (including, without limitation, any negligence of Secured Party) or otherwise; provided, however, that nothing herein contained shall affect any right of Debtor to enforce against Secured Party any claim which Debtor may have against Secured Party in any manner other than by abatement, attachment or recoupment of, interference with, or set-off, counterclaim or defense against, the aforementioned payments to be made to such assignee. Debtor's undertaking herein to pay and perform the Liabilities to an assignee of Secured Party shall constitute a direct, independent and unconditional obligation of Debtor to said assignee. Said assignee shall have no obligations under this Agreement or in respect of the Equipment and shall have no obligation to install, erect, test, adjust or service the Equipment. Debtor also acknowledges and agrees that any assignee of Secured Party's interest in this Agreement shall have the right to exercise all rights, privileges and remedies (either in its own name or in the name of Secured Party) which by the terms of this Agreement are permitted to be exercised by Secured Party. 6. DAMAGE TO OR LOSS OF THE EQUIPMENT; REQUISITION. Debtor assumes and shall bear the entire risk of loss or damage to the Equipment from any and every cause, whatsoever. No loss or damage to the Equipment or any part thereof shall affect any obligation of Debtor with respect to the Liabilities and this Agreement, which shall continue in full force and effect. Debtor shall advise Secured Party in writing promptly of any item of Equipment lost or damaged and of the circumstances and extent of such damage. If the Equipment is totally destroyed, irreparably damaged, lost, stolen or title thereto shall be requisitioned or taken by any governmental authority under the power of eminent domain or otherwise, Debtor shall, at the option of Secured Party, replace the same with like equipment in good repair, condition and working order, or pay to Secured Party all Liabilities due and to become due, less the net amount of the recovery, if any, actually received by Secured Party from insurance or otherwise for such destruction, damage, loss, theft, requisition or taking. Whenever the Equipment is destroyed or damaged and, in the reasonable discretion of Secured Party, such destruction or damage can be repaired, Debtor shall, at its expense, promptly effect such repairs as Secured Party shall deem necessary for compliance with clause (a) of paragraph 8 below. Any proceeds of insurance received by Secured Party with respect to such reparable damage to the Equipment shall, at the election of Secured Party, be applied either to the repair of the Equipment by payment by Secured Party directly to the party completing the repairs, or to the reimbursement of Debtor for the cost of such repairs; provided, however, that Secured Party shall have no obligation to make such payment or any part thereof until receipt of such evidence as Secured Party shall deem satisfactory that such repairs have been completed and further provided that Secured Party may apply such proceeds to the payment of any of the Liabilities or the Other Liabilities due if at the time such proceeds are received by Secured Party there shall have occurred and be continuing any Event of Default hereunder or any event which with lapse of time or notice, or both, would become an Event of Default. Debtor shall, when and as reasonably requested by Secured Party, undertake, by litigation or otherwise, in Debtor's name, the collection of any claim against any person for such destruction, damage, loss, theft, requisition or taking, but Secured Party shall not be obligated to undertake, by litigation or otherwise, the collection of any claim against any person for such destruction, damage, loss, theft, requisition or taking. 7. REPRESENTATIONS AND WARRANTIES OF DEBTOR. Debtor represents and warrants that: it has the right, power and authority to enter into and carry out the terms and provisions of this Agreement; this Agreement constitutes a valid obligation of the Debtor and is enforceable in accordance with its terms; and entering into this Agreement and carrying out its terms and provisions will not violate the terms or constitute a breach of any other agreement to which Debtor is a party. 8. AFFIRMATIVE COVENANTS OF DEBTOR. Debtor shall (a) cause the Equipment to be kept in good condition and use the Equipment only in the manner for which it was designed and intended so as to subject it only to ordinary wear and tear and cause to be made all needed and proper repairs, renewals and replacements thereto; (b) maintain at all times property damage, fire, theft and comprehensive insurance for the full replacement value of the Equipment, with loss payable provisions in favor of Secured Party and any assignee of Secured Party as their interests may appear, and maintain public liability insurance in amounts satisfactory to Secured Party, naming Secured Party and any assignee of Secured Party as insureds with all of said insurance and loss payable provisions to be in form, substance and amount and written by companies reasonably satisfactory to Secured Party, and deliver the policies therefor, or duplicates thereof, to Secured Party; (c) pay or reimburse Secured Party for any and all taxes, assessments and other governmental charges of whatever kind or character, however designated (together with any penalties, fines or interest thereon) levied or based upon or with respect to the Equipment, the Liabilities or this Agreement or upon the manufacture, purchase, ownership, delivery, possession, use, storage, operation, maintenance, repair, return or other disposition of the Equipment, or upon any receipts or earnings arising therefrom, or for titling or registering the Equipment, or upon the income or other proceeds received with respect to the Equipment or this Agreement provided, however, that Debtor shall pay taxes on or measured by the net income of Secured Party and franchise taxes of Secured Party only to the extent that such net income taxes or franchise taxes are levied or assessed in lieu of any other taxes, assessments or other governmental charges hereinabove described; (d) pay all shipping and delivery charges and other expenses incurred in connection with the Equipment and pay all lawful claims, whether for labor, materials, supplies, rents or services, which might or could if unpaid become a lien on the Equipment; (e) comply with all governmental laws, regulations, requirements and rules, all instructions and warranty requirements of Secured Party or the manufacturer of the Equipment, and with the conditions and requirements of all policies of insurance with respect to the Equipment and this Agreement; (f) mark and identify the Equipment with all information and in such manner as Secured Party may reasonably request from time to time and replace promptly any such marking or identification which are removed, defaced or destroyed; (g) at any and all times during business hours, grant to Secured Party free access to enter upon the premises wherein the Equipment shall be located and permit Secured Party to inspect the Equipment; (h) reimburse Secured Party for all charges, costs and expenses (including reasonable attorneys' fees) incurred by Secured Party in defending or protecting its interests in the Equipment, in the attempted enforcement or enforcement of the provisions of this Agreement or in the attempted collection or collection of any of the Liabilities; (i) indemnify and hold any assignee of Secured Party, and Secured Party, harmless from and against all claims, losses, liabilities, damages, judgments, suits, and all legal proceedings, and any and all costs and expenses in connection therewith (including reasonable attorneys' fees) arising out of or in any manner connected with the manufacture, purchase, ownership, delivery, possession, use, storage, operation, maintenance, repair, return or other disposition of the Equipment or with this Agreement, including, without limitation, claims for injury to or death of persons and for damage to property, and give Secured Party prompt notice of any such claim or liability, provided, however, that Debtor shall not be obligated to indemnify or hold any assignee of Secured Party, or Secured Party, harmless from or against any claims, losses, liabilities, damages, judgments, suits, or legal proceedings arising out of the gross negligence or intentional misconduct of Secured Party or any assignee (or any of their agents) in connection with the repossession or subsequent use, storage, operation, maintenance, repair, or disposition of the Equipment; and (j) maintain a system of accounts established and administered in accordance with generally accepted accounting principles and practices consistently applied, and, within forty-five (45) days after the end of each fiscal quarter, make available to Secured Party a balance sheet as at the end of such quarter and statement of operations for such quarter, and, within one hundred and twenty (120) days after the end of each fiscal year, make available to Secured Party a balance sheet as at the end of such year and statement of operations for such year, in each case prepared in accordance with generally accepted accounting principles and practices consistently applied and certified by Debtor's chief financial officer as fairly presenting the financial position and results of operation of Debtor, and, in the case of year end financial statements, certified by an independent accounting firm acceptable to Secured Party. 9. NEGATIVE COVENANTS OF DEBTOR. Debtor shall not (a) create, incur, assume or suffer to exist any mortgage, lien, pledge or other encumbrance or attachment of any kind whatsoever upon, affecting or with respect to the Equipment or this Agreement or any of Debtor's interests hereunder, except for (i) any lien for taxes, fees, assessments or other governmental charges which are not delinquent or, in a jurisdiction where payment of such liabilities is abated during the period of any contest, being contested in good faith by appropriate proceedings, (ii) statutory liens for warehousemen, carriers, mechanics and materialmen, and others arising by operation of law in the ordinary course of the Debtor's business (except for landlords' liens) and which are not delinquent, remain payable without penalty, or are being contested in good faith by appropriate proceedings, which proceedings have the effect of preventing forfeiture or sale of the Equipment subject thereto, and (iii) liens consisting of judgment or judicial attachment liens, provided that (1) the enforcement of such liens is effectively stayed and Debtor has pledged additional replacement collateral to Secured Party of equal or greater value than the amount of such liens, in each case within fifteen (15) days after the entry thereof or (2) all such unstayed liens at any time outstanding for Borrower do not exceed $25,000 in the aggregate; (b) make any changes or alterations in or to the Equipment except as necessary for compliance with clause (a) of paragraph 8 above or any modifications intended to extend the performance or usefulness of the Equipment, provided however that no such modification shall be made if it reduces the value or marketability of the Equipment and any modification made shall become the property of Secured Party unless it can be removed without damaging the Equipment; (c) permit the name of any person, association or corporation other than Secured Party to be placed on the Equipment as a designation that might be interpreted as a claim of interest in the Equipment; (d) part with possession or control of or suffer or allow to pass out of its possession or control any of the Equipment or change the location of the Equipment or any part thereof from the locations shown above or any other business location of Debtor as to which Debtor gives notice to Secured Party in compliance with clause (f) of this paragraph, except for (i) transportation between any such locations, and (ii) repair or servicing of the Equipment in the ordinary course of business; (e) assign or in any way dispose of all or any part of its rights or obligations under this Agreement or enter into any lease of all or any part of the Equipment; (f) change its name or address from that set forth above unless it shall have given Secured Party no less than thirty (30) days prior written notice thereof; (g) sell any shares of its capital stock or transfer any ownership interest in the Debtor to any person, persons, entity or entities (whether in one single transaction or in multiple transactions) which results in a transfer of a majority interest in the ownership and/or the control of the Debtor from the person, persons, entity or entities who hold ownership and/or control of the Debtor as of the date of this Agreement; or (h) consolidate with or merge into or with any other entity, unless (i) the Debtor shall be the continuing or surviving entity, (ii) the consolidation or merger shall be between two of the Debtors shown above on the first page of this Agreement (or identified in any amendment hereto), or (iii) the consolidation or merger shall be between any of such Debtors and an entity that is wholly owned by such Debtor or any of the other of such Debtors and such entity agrees to assume the obligations of and be a Debtor under this Agreement and (iv) such consolidation or merger does not result in a material adverse change in the financial condition of the surviving Debtor(s) on a consolidated basis as compared to such condition as at the date hereof; or (i) sell, transfer, lease or otherwise dispose of all or substantially all of Debtor's assets to any person or entity other than (i) another Debtor or (ii) an entity that is wholly owned by such Debtor or any other Debtor and such entity agrees to assume the obligations of and be a Debtor under this Agreement and (iii) such sale, transfer, lease or other disposition of Debtor's assets does not result in a material adverse change in the financial condition of the surviving Debtor(s) on a consolidated basis as compared to such condition as at the date hereof. 10. EQUIPMENT PERSONALTY. The Equipment is, and shall at all times be and remain, personal property notwithstanding that the Equipment or any part thereof may now be, or hereafter become, in any manner affixed or attached to, or imbedded in, or permanently resting upon, real property or attached in any manner to real property by cement, plaster, nails, bolts, screws or otherwise. If requested by Secured Party with respect to any item of Equipment, Debtor will obtain and deliver to Secured Party waivers of interest or liens in recordable form, satisfactory to Secured Party, from all persons claiming any interest in the real property on which such item of Equipment is installed or located. 11. EVENTS OF DEFAULT AND REMEDIES. If any one or more of the following events ("Events of Default") shall occur: (a) Debtor shall fail to make (i) any monthly payment of the Time Balance as set forth in each Loan Schedule within five (5) days of when due; or (ii) any other payment in respect of the Liabilities when due and such failure shall continue unremedied for five (5) days after notice thereof to Debtor ; or (b) any certification, statement, representation, warranty or financial report or statement heretofore or hereafter furnished by or on behalf of Debtor or any guarantor of any or all of the Liabilities proves to have been false in any material respect at the time as of which the facts therein set forth were stated or certified or has omitted any material contingent or unliquidated liability or claim against Debtor or any such guarantor; or (c) Debtor or any guarantor of any or all of the Liabilities shall fail to perform or observe any covenant, condition or agreement to be performed or observed by it hereunder or under any guaranty agreement and, in the case of any failure that is capable of being remedied, such failure shall continue unremedied for fifteen (15) days after notice thereof to Debtor; or (d) Debtor or any guarantor of any or all of the Liabilities shall be in breach of or in default in the payment and performance of any obligation relating to any of the Other Liabilities or any other obligation of Debtor owed to Secured Party, including those assigned to Secured Party by third persons, after giving effect to any applicable cure period; or (e) Debtor or any guarantor of any of Debtor's obligations hereunder shall be in breach of or in default (after giving effect to any applicable cure period) in the payment or performance of any obligation in excess of five hundred thousand dollars ($500,000.00) owing to any bank, lender, lessor or financial institution, howsoever arising, present or future, contracted for or acquired, and whether joint, several, absolute, contingent, secured, unsecured, matured or unmatured, and such lender has accelerated its rights with respect thereto; or (f) Debtor or any guarantor of any or all of the Liabilities shall cease doing business as a going concern (except as permitted by clause (h) or clause (i) of paragraph 9 above), make an assignment for the benefit of creditors, admit in writing its inability to pay its debts as they become due, file a petition commencing a voluntary case under any chapter of Title 11 of the United States Code entitled "Bankruptcy" (the "Bankruptcy Code"), be adjudicated an insolvent, file a petition seeking for itself any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar arrangement under any present or future statute, law, rule or regulation or file an answer admitting the material allegations of a petition filed against it in any such proceeding, consent to the filing of such a petition or acquiescence in the appointment of a trustee (other than a trustee under a deed of trust or similar instrument), receiver or liquidator of it or of all or any part of its assets or properties, or take any action looking to its dissolution or liquidation; or (g) an order for relief against Debtor or any guarantor of any or all of the Liabilities shall have been entered under any chapter of the Bankruptcy Code or a decree or order by a court having jurisdiction in the premises shall have been entered approving as properly filed a petition seeking reorganization, arrangement, readjustment, liquidation, dissolution or similar relief against Debtor or any guarantor of any or all of the Liabilities under any present or future statute, law, rule or regulation, or within sixty (60) days after the appointment without Debtor's or such guarantor's consent or acquiescence of any trustee, receiver or liquidator of it or such guarantor or of all or any part of its or such guarantor's assets and properties, such appointment shall not be vacated, or an order, judgment or decree shall be entered against Debtor or such guarantor by a court of competent jurisdiction and shall continue in effect for any period of fifteen (15) consecutive days without a stay of execution, or any execution or writ or process shall be issued under any action or proceeding against Debtor whereby the Equipment or its use may be taken or restrained except as permitted in accordance with clause (a)(iii) of paragraph 9 above; or (h) Debtor or any guarantor of any or all of the Liabilities shall suffer an adverse material change in its financial condition as compared to such condition as at the date hereof, and as a result of such change in condition Secured Party reasonably deems itself or the Equipment to be insecure; then and in any such event, Secured Party may, at the sole discretion of Secured Party, without notice or demand (except as expressly provided herein) and without limitation of any rights and remedies of Secured Party under the Uniform Commercial Code, take any one or more of the following steps: (1) Declare all of the Time Balance to be due and payable, whereupon the same shall forthwith mature and become due and payable as provided for in paragraph 16 below, provided, however, upon the occurrence of any of the events specified in subparagraphs (f) and (g) above, all sums as specified in this clause (1) shall immediately be due and payable without notice to Debtor (the date on which Secured Party declares all of the Time Balance to be due and payable is hereinafter referred to as the "Declaration Date"); (2) proceed to protect and enforce its rights by suit in equity, action at law or other appropriate proceedings, whether for the specific performance of any agreement contained herein, or for an injunction against a violation of any of the terms hereof, or in aid of the exercise of any other right, power or remedy granted hereby or by law, equity or otherwise; and (3) at any time and from time to time, with or without judicial process and the aid or assistance of others, enter upon any premises wherein any of the Equipment may be located and, without resistance or interference by Debtor, take possession of the Equipment on any such premises, and require Debtor to assemble and make available to Secured Party at the expense of Debtor any part or all of the Equipment at any place or time designated by Secured Party; and remove any part or all of the Equipment from any premises wherein the same may be located for the purpose of effecting the sale or other disposition thereof; and sell, resell, lease, assign and deliver, grant options for or otherwise dispose of any or all of the Equipment in its then condition or following any commercially reasonable preparation or processing, at public or private sale or proceedings, by one or more contracts, in one or more parcels, at the same or different times, with or without having the Equipment at the place of sale or other disposition, for cash and/or credit, and upon any terms, at such place(s) and time(s) and to such persons, firms or corporations as Secured Party shall deem best, all without demand for performance or any notice or advertisement whatsoever, except that Debtor shall be given five (5) business days' written notice of the place and time of any public sale or of the time after which any private sale or other intended disposition is to be made, which notice Debtor hereby agrees shall be deemed reasonable notice thereof. If any of the Equipment is sold by Secured Party upon credit or for future delivery, Secured Party shall not be liable for the failure of the purchaser to pay for same and in such event Secured Party may resell such Equipment. Secured Party may buy any part or all of the Equipment at any public sale and if any part or all of the Equipment is of a type customarily sold in a recognized market or which is the subject of widely distributed standard price quotations Secured Party may buy at private sale and may make payment therefor by application of all or a part of the Liabilities and of all or a part of any Other Liabilities. Any personalty in or attached to the Equipment when repossessed may be held by Secured Party without any liability arising with respect thereto, and any and all claims in connection with such personalty shall be deemed to have been waived unless notice of such claim is made by certified or registered mail upon Secured Party within five business days after repossession. Secured Party shall apply the cash proceeds from any sale or other disposition of the Equipment first, to the reasonable expenses of re-taking, holding, preparing for sale, selling, leasing and the like, and to reasonable attorneys' fees and other expenses which are to be paid or reimbursed to Secured Party pursuant hereto, and second, to all outstanding portions of the Liabilities and to any Other Liabilities in such order as Secured Party may elect, and third, any surplus to Debtor, subject to any duty of Secured Party imposed by law to the holder of any subordinate security interest in the Equipment known to Secured Party; provided however, that Debtor shall remain liable with respect to unpaid portions of the Liabilities owing by it and will pay Secured Party on demand any deficiency remaining with interest as provided for in paragraph 16 below. 12. SECURED PARTY'S RIGHT TO PERFORM FOR DEBTOR. If Debtor fails to perform or comply with any of its agreements contained herein Secured Party may perform or comply with such agreement and the amount of any payments and expenses incurred by Secured Party in connection with such performance or compliance, together with interest thereon at the rate provided for in paragraph 16 below, shall be deemed a part of the Liabilities and shall be payable by Debtor upon demand. 13. FURTHER ASSURANCES. Debtor will cooperate with Secured Party for the purpose of protecting the interests of Secured Party in the Equipment, including, without limitation, the execution of all Uniform Commercial Code financing statements requested by Secured Party. Secured Party and any assignee of Secured Party are each authorized to the extent permitted by applicable law to file one or more Uniform Commercial Code financing statements disclosing any security interest in the Equipment without the signature of Debtor or signed by Secured Party or any assignee of Secured Party as attorney-in-fact for Debtor. Debtor will pay all costs of filing any financing, continuation or termination statements with respect to this Agreement, including, without limitation, any documentary stamp taxes relating thereto. Debtor will do whatever may be necessary to have a statement of the interest of Secured Party and of any assignee of Secured Party in the Equipment noted on any certificate of title relating to the Equipment and will deposit said certificate with Secured Party or such assignee. Debtor shall execute and deliver to Secured Party, upon request, such other instruments and assurances as Secured Party reasonably deems necessary or advisable for the implementation, effectuation, confirmation or perfection of this Agreement and any rights of Secured Party hereunder. 14. NON-WAIVER; ETC. No course of dealing by Secured Party or Debtor or any delay or omission on the part of Secured Party in exercising any rights hereunder shall operate as a waiver of any rights of Secured Party. No waiver or consent shall be binding upon Secured Party unless it is in writing and signed by Secured Party. A waiver on any one occasion shall not be construed as a bar to or a waiver of any right and/or remedy on any future occasion. To the extent permitted by applicable law, Debtor hereby waives the benefit and advantage of, and covenants not to assert against Secured Party, any valuation, inquisition, stay, appraisement, extension or redemption laws now existing or which may hereafter exist which, but for this provision, might be applicable to any sale or other disposition made under the judgment, order or decree of any court or under the powers of sale and other disposition conferred by this Agreement or otherwise. Debtor hereby waives any right to a jury trial with respect to any matter arising under or in connection with this Agreement. 15. ENTIRE AGREEMENT; SEVERABILITY; ETC. This Agreement constitutes the entire agreement between Secured Party and Debtor and all conversations, agreements and representations relating to this Agreement or to the Equipment are integrated herein. If any provision hereof or any remedy herein provided for shall be invalid under any applicable law, such provision or remedy shall be inapplicable and deemed omitted, but the remaining provisions and remedies hereunder shall be given effect in accordance with the intent hereof. Neither this Agreement nor any term hereof may be changed, discharged, terminated or waived except in an instrument in writing signed by the party against which enforcement of the change, discharge, termination or waiver is sought. This Agreement shall in all respects be governed by and construed in accordance with the internal laws of the State of New York, including all matters of construction, validity and performance, and shall be deemed a purchase money security agreement within the meaning of the Uniform Commercial Code. The captions in this Agreement are for convenience of reference only and shall not define or limit any of the terms or provisions hereof. This Agreement shall inure to the benefit of and be binding upon Secured Party and Debtor and their respective successors and assigns, subject, however, to the limitations set forth in this Agreement with respect to Debtor's assignment hereof. No right or remedy referred to in this Agreement is intended to be exclusive but each shall be cumulative and in addition to any other right or remedy referred to in this Agreement or otherwise available to Secured Party at law or in equity, and shall be in addition to the provisions contained in any instrument referred to herein and any instrument supplemental hereto. Debtor shall be liable for all reasonable costs and expenses, including reasonable attorneys' fees and disbursements, incurred by reason of the occurrence of any Event of Default or the exercise of Secured Party's remedies with respect thereto. Time is of the essence with respect to this Agreement and all of its provision. 16. PREPAYMENT; REBATE; INTEREST. Except for the installment payments of the Time Balance as set forth in the Schedule of Obligations and as provided in the Prepayment Agreement(s) between Debtor and Secured Party, the Debtor may not prepay the Time Balance, in whole or in part, at any time. In the event Secured Party declares all of the Time Balance to be due and payable pursuant to clause (1) of paragraph 11 above, Debtor shall pay to Secured Party an amount equal to the sum of (a) all accrued and unpaid amounts as of the Declaration Date plus interest thereon, and (b) the present value of all future installments set forth in this Agreement over the remaining unexpired term of this Agreement discounted to present value using a discount rate of five percent (5%), provided that the amount of interest earned by Secured Party computed as aforesaid shall not exceed the highest amount permitted by applicable law. The Time Balance as reduced to present value in accordance with the preceding sentence shall bear interest from and after the Declaration Date, and all other Liabilities due and payable under this Agreement (including past due installments) shall bear interest from and after their respective due dates, at the lesser of 1.25% per month or the highest rate permitted by applicable law, provided, however, that Debtor shall have no obligation to pay any interest on interest except to the extent permitted by applicable law. 17. CONSENT TO JURISDICTION. Debtor hereby irrevocably consents to the jurisdiction of the courts of the State of New York and of any federal court located in such state in connection with any action or proceeding arising out of or relating to this Agreement or the transactions contemplated hereby. Any such action or proceeding will be maintained in the United States District Court for the Southern District of New York or in any court of the State of New York located in the County of New York and Debtor waives any objections based upon venue or FORUM NON CONVENIENS in connection with any such action or proceeding. Debtor consents that process in any such action or proceeding may be served upon it by registered mail directed to Debtor at its address set forth at the head of this Agreement or in any other manner permitted by applicable law or rules of court. Debtors, The Cobalt Group, Inc. and IL Acquisition, Inc., hereby irrevocably appoint JGB Service Corporation, 600 University Street, Suite 3600, Seattle, WA 98101 as their agent to receive service of process in any such action or proceeding and Debtor, PartsVoice LLC, hereby irrevocably appoints Darin Carlson, 900 S. W. Fifth Avenue, Suite 2600, Portland, OR 97204 as its agent to receive service of process in any such action or proceeding. 18. NOTICES. Notice hereunder shall be deemed given if served personally or by certified or registered mail, return receipt requested, to Secured Party and Debtor at their respective addresses set forth at the head of this Agreement. Any party hereto may from to time by written notice to the other change the address to which notices are to be sent to such party. A copy of any notice sent by Debtor to Secured Party shall be concurrently sent by Debtor to any assignee of Secured Party of which Debtor has notice. 19. STATUTORY NOTICES. WARNING Unless you provide us with evidence of the insurance coverage as required by our contract or loan agreement, we may purchase insurance at your expense to protect our interest. This insurance may, but need not, also protect your interest. If the collateral becomes damaged, the coverage we purchase may not pay any claim you make or any claim made against you. You may later cancel this coverage by providing evidence that you have obtained property coverage elsewhere. You are responsible for the cost of any insurance purchased by us. The cost of this insurance may be added to your contract or loan balance. If the cost is added to your contract or loan balance, the interest rate on the underlying contract or loan will apply to this added amount. The effective date of coverage may be the date your prior coverage lapsed or the date you failed to provide proof of coverage. The coverage we purchase may be considerably more expensive than insurance you can obtain on your own and may not satisfy any need for property damage coverage or any mandatory liability insurance requirements imposed by applicable law. UNDER OREGON LAW (ORS 41.580), AFTER OCTOBER 8, 1989, MOST AGREEMENTS, PROMISES AND COMMITMENTS MADE BY A LENDING PARTY CONCERNING LOANS AND OTHER CREDIT EXTENSIONS WHICH ARE NOT FOR PERSONAL, FAMILY OR HOUSEHOLD PURPOSES, OR SECURED SOLELY BY THE BORROWER'S RESIDENCE, MUST BE IN WRITING, SET FORTH THE CONSIDERATION GIVEN AND BE SIGNED BY AN AUTHORIZED REPRESENTATIVE OF THE LENDING PARTY TO BE ENFORCEABLE. ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW. As used herein for the purposes of this paragraph 19 only: "You" shall mean the Debtor. "We" or "us" shall mean the Secured Party. The Debtor agrees to all the provisions set forth above. This Agreement is executed pursuant to due authorization. DEBTOR ACKNOWLEDGES RECEIPT OF A SIGNED TRUE COPY OF THIS AGREEMENT. Date 20 Accepted on 20 -------------------------- ---- --------------------- ---- THE COBALT GROUP, INC. (Debtor) CHARTER FINANCIAL, INC. (Secured Party) (Signature of Proprietor or name of Corporation or Partnership) By___________________________________ By______________________________ James M. Giaimo Its__________________________________ Its Vice President (if Corporation, President or Vice President should sign and give official title; if Partnership, state partner; if L.L.C., state member or manager) PARTSVOICE, LLC (Debtor) By The Cobalt Group, Inc. By___________________________________ Its__________________________________ (if Corporation, President or Vice President should sign and give official title; if Partnership, state partner; if L.L.C., state member or manager) IL ACQUISITION INC. (Debtor) By___________________________________ Its__________________________________ (if Corporation, President or Vice President should sign and give official title; if Partnership, state partner; if L.L.C., state member or manager) EX-10.4 3 EXHIBIT 10.4 RIDER TO MASTER LOAN AND SECURITY AGREEMENT NO. _______ DATED ________ ______ (THE "AGREEMENT"), AND ALL LOAN SCHEDULES THERETO (EACH A "LOAN SCHEDULE, COLLECTIVELY THE "LOAN SCHEDULES") BY AND BETWEEN THE COBALT GROUP, INC., PARTSVOICE, LLC AND IL ACQUISITION INC. AS CO-DEBTORS (EACH A "DEBTOR", COLLECTIVELY, THE "DEBTORS") AND CHARTER FINANCIAL, INC. AS SECURED PARTY ("SECURED PARTY") Debtors and Secured Party covenant and agree as follows: 1. Debtors shall remain in compliance with the following provision: (i) Debtors' Unrestricted Cash shall be no less than $7,000,000 at all times during the term of the Agreement or any Loan Schedule thereunder. As used herein: Unrestricted Cash means the minimum cash balance on Debtors' consolidated balance sheet in the form of cash or readily marketable securities which has not been pledged, encumbered, restricted or otherwise assigned to or by any third party. All other accounting terms not defined herein shall have the meanings ascribed to them according to generally accepted accounting principles, consistently applied. 2. In order to enable Secured Party to review Debtors' compliance with the foregoing terms, conditions and covenants, Debtors shall, within fifteen (15) days of the end of each calendar month, provide Secured Party with (a) an affidavit from the chief financial officer or the Vice President of Finance for The Cobalt Group, Inc. stating that the Debtors have (i) complied and are then in compliance with each of the covenants contained in this Rider, or in the event of any non-compliance, stating the extent of any such non-compliance, and (ii) paid the monthly rental payment to the landlord on the real estate lease for the premises located at 2200 First Avenue South, Suite 400, Seattle, Washington, 98134 and (b) a monthly bank statement for such month and proof of payment for such rental payment to the landlord. 3. (a) In the event that Debtors fail to be in compliance with any of the provisions set forth hereinabove (an "LC Event"), Debtors shall deliver to Secured Party, within ten days of the occurrence of such failure, an irrevocable standby letter of credit issued by a recognized financial institution acceptable to Secured Party in an amount equal to the sum of the present value of the then remaining payments due under all then existing Loan Schedules during the remaining terms thereof, discounted at a rate equal to five percent (5%), which letter of credit shall be substantially in the form annexed hereto as Exhibit 1 (the "LC"). Such LC shall secure the payment of all Liabilities (as defined in the Agreement) and performance of all other obligations of Debtors to Secured Party and its assigns under the Agreement. Once an LC Event has occurred, unless the LC has been released in accordance with paragraph 3 (b) below, it shall be an Event of Default under the Agreement if at any time during which any amounts remain due under the Agreement or any Loan Schedule, the LC is not in full force and effect or if Secured Party receives notice that the LC will not be replaced or renewed. (b) After the occurrence of an LC Event, Secured Party shall retain the LC as collateral 1 security until such time as (i) all of the Liabilities under all of the Loan Schedules to the Agreement have been satisfied in full, or (ii) Debtors' Unrestricted Cash is thereafter increased to more than $7,000,000 (A) for a period of not less than ninety (90) consecutive days by borrowing additional Working Capital, or (B) by raising or generating additional Liquidity. In the event that Debtor increases its Unrestricted Cash in accordance with this paragraph 3 (b), upon Debtor's written request supplying Secured Party with evidence of such compliance and provided that no other Event of Default has occurred under the Agreement, Secured Party shall return the LC to Debtors. As used herein: "Liquidity" means any proceeds to the Debtors only to the extent that such proceeds have been generated or received by the Debtors and excluding (i) the proceeds of any debt the terms of which provide for scheduled principal payments during the term of any of the Loan Schedules, and (ii) Working Capital. "Working Capital" means any proceeds to the Debtors from a working capital facility with a working capital lender. 4. All other terms and conditions of the Agreement and the Loan Schedules shall remain in full force and effect. In the event that there is any conflict between the terms and conditions of this Rider and the terms and conditions of the Agreement or the Loan Schedules, the terms and conditions of this Rider shall govern. All of the terms, conditions and provisions hereunder shall be deemed to be an indivisible part of and supplement to the Agreement and the Loan Schedules. THE COBALT GROUP, INC. CHARTER FINANCIAL, INC. By:__________________________ By:_________________________ Title:_________________________ Title:________________________ PARTSVOICE, LLC BY THE COBALT GROUP, INC. By:__________________________ Title:_________________________ IL ACQUISITION, INC. By:__________________________ Title:_________________________ 2 EX-27 4 EXHIBIT 27
5 1,000 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 16,817 0 6,564 533 0 31,014 7,604 2,046 67,091 14,357 0 0 0 172 51,433 67,091 0 9,284 0 1,775 11,111 36 68 3,027 0 3,027 0 0 0 3,027 0.18 0.16 Net income includes $6.4 million gain on sale of YachtWorld
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